Overlapping shocks test the Pacific’s limited resilience

Pacific Island countries are under sustained pressure. The past decade has brought a near-continuous series of global shocks, from the Covid pandemic and Russia’s invasion of Ukraine to surging inflation and sweeping cuts to foreign aid budgets. These crises compound the region’s structural vulnerability to disasters as Pacific economies confront waves of cyclones, earthquakes, and droughts. With thin fiscal buffers and high reliance on external financing, the region’s economies have limited capacity to absorb negative shocks without outside support.

The Iran war has been the latest of these external shocks. The conflict has driven up fuel and fertiliser prices, disrupted global shipping, and weakened growth prospects worldwide. At the time of writing, an interim peace deal has been reached, and global energy prices have receded considerably from previous highs. However, the outlook is deeply uncertain, and the prospect of renewed conflict and protracted economic disruption remains.

The Pacific is acutely exposed to the effects of the conflict, being heavily reliant on imported fuel and food, long shipping routes, and, for several economies, international tourism. Strong El Niño conditions are also expected in the latter half of 2026, which will place further pressure on regional economies and food security. Fragile revenue bases and underdeveloped social protection systems mean Pacific governments struggle to shield households from the strain.

Aid and other official development finance (ODF) remain central to how Pacific governments weather shocks and build resilience. This year’s Pacific Aid Map captures the position from which the region now confronts both the crisis and longer-term development challenges. Total ODF held relatively stable at $4.1 billion in 2024, the most recent year of complete project-level data, and is estimated to have declined only modestly to $3.8 billion in 2025, despite substantial cuts to global aid budgets.

That relative stability owes much to the dominant regional roles of Australia and, to a lesser extent, the multilateral development banks (MDBs), which together account for close to 60% of all Pacific ODF and have partly offset cuts elsewhere. However, the composition of this financing has shifted, with loans increasingly replacing stagnant grant support.

Geopolitical competition continues to shape the Pacific’s development finance landscape. Australia has steadily expanded its infrastructure financing while emerging as the region’s largest source of new loan commitments. Despite broader aid cuts, the Trump administration has protected and renewed its Compact agreements with the three North Pacific states, the centrepiece of its regional engagement.

China, for its part, has consolidated its post-2018 regional aid strategy around targeted, high-visibility grants, small-scale local projects, and strategic in-kind support. Funding remains closely aligned with diplomatic and strategic priorities, most recently in Nauru and Vanuatu. Although new Chinese lending to the Pacific remains subdued, the legacy of earlier loans continues to weigh heavily on several Pacific countries. At the same time, Chinese state-owned firms continue to secure MDB-funded construction contracts, extending Beijing’s reach well beyond its own directly financed projects.

Beyond this competition, the outlook for the Pacific hinges on the scale of the international response to the Iran war, which itself remains uncertain. Previous shocks, such as the global financial crisis and the Covid pandemic, triggered rapid, large-scale surges in development support for the region. So far, signs of a significant international financing response remain limited, though Australia and the MDBs have announced several important measures.

Responding to immediate fiscal pressures while building long-term resilience will be critical for the region’s outlook. Budget support linked to economic reform is likely to be central to stabilising Pacific government finances. At the same time, the current environment has underscored the need for greater investment in energy security and social protection, both of which remain underfunded despite their growing importance in a more shock-prone and climate-exposed region.

Without a commensurate international response and real gains in resilience, the economic and social impacts of shocks such as the Iran war are likely to be more severe and long-lasting. As one measure of the cumulative toll of this decade’s overlapping crises, we estimate that average Pacific income per person could still sit 2–4% below its pre-Covid level by 2027, sealing in a “lost decade” of development. The consequences would be felt in household incomes, poverty, jobs, food insecurity, and government finances, with cascading risks to governance, social stability, and regional security.

Notes: The term ‘Pacific’ in this report refers to the Pacific Islands region. In line with international reporting, all figures in this report are in US dollars unless otherwise specified. This year, the Pacific Aid Map interactive features multiple currency options across all map and data tool pages.